Commercial real estate still struggling

    As BizTimes Milwaukee reported in a recent cover story, six prominent Wisconsin economists do not believe the economy is headed for a double-dip recession.

    That being said, one sector in which the economic recovery has been slow, if not almost nonexistent, is commercial real estate. Take a look around. You don’t see too many construction cranes in the skyline or bulldozers in the ground.

    That’s why it was eye-catching to see a couple of recent national news stories indicating that there are faint signs of hope in the commercial real estate markets on the coasts.

    For some homegrown perspective, I turned this week to Mark Eppli, Ph.D., who is the Robert B. Bell Sr. chair at Marquette University’s Center for Real Estate.

    Eppli is by nature an optimistic fellow. But he’s not exactly spinning cartwheels about the commercial real estate market in the second half of 2010.

    When asked to respond to the recent reports about glimmers of faint hope in commercial real estate, here is Eppli’s response:
    “The operative word is ‘faint.’ In 2009 REITs (Real Estate Investment Trusts) raised $26 billion and debt capital for large private equity firms and REITs also returned, but as they say, only in the large liquid markets.  Here is the problem, while REITs have raised a nice kitty of investment funds, they have no place to go with them.  Large institutional property owners do not want to sell into a weak market, and the new money wants solid returns. 
    “In 2009, sale transaction volume was 10 to 15 percent of 2006/7 transaction volume.  While transaction volume in 2006/7 was unsustainably high, it appears as if the 2010 transaction volume remains unsustainably low.  Additionally, the bank ‘extend and pretend’ is going nicely from the banks’ perspective, which greatly limits new ‘for sale’ product and new bank funds available for commercial loans.
    “I have not seen even a ‘faint pulse’ from Wisconsin lenders.  They still have too much commercial real estate on their books and have little-to-no appetite for more commercial real estate, and the regulators make certain that their appetite for more real estate remains low.
    “That’s my take.  The capital log jam is silly (for lack of a better word).  It seems clear that commercial real estate bottomed out late last year. Underwriting on new product should begin in earnest as markets have stabilized, albeit at new levels with new underwriting criteria that is more conservative, but within reason.  I was hoping that new commitments to commercial real estate from Wisconsin banks would firm up in the second half of 2010, but it looks like new commercial real estate lending will be pushed into 2011 (hopefully not beyond). However, who needs more space if there are not any new employees?”

    There you have it. Banks will begin lending for commercial real estate again when developers have the collateral and pre-committed anchor tenants. Developers will have the collateral and pre-committed anchor tenants when those tenants have reason to move or expand. Those tenants will have reason to move or expand when their customers start buying more goods and services again.

    It’s happening. It just can’t happen soon enough.

    Steve Jagler is executive editor of BizTimes Milwaukee.

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